Chakraborty, Avik, 1975-
Haynes, Stephen E., 1945-
2005-12-15T16:43:08Z
2005-12-15T16:43:08Z
2005-09-15
http://hdl.handle.net/1794/1928
23 p.
This paper explores from a new perspective the forward premium puzzle, i.e., why a regression of the change in the future spot exchange rate on the forward premium paradoxically yields a coefficient that is frequently negative. This traditional specification is compared theoretically and empirically to a "level" regression of the future spot rate on the current forward rate, which does not display the puzzle. We explore both non-rationality and risk premium explanations. The general conclusionis that, with non-rationality, any modest deviation from unity in the level coefficient becomes greatly magnified in the forward premium coefficient because of the stationary/nonstationary properties of the relevant variables, thereby generating the puzzle.
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University of Oregon, Dept of Economics
University of Oregon Economics Department Working Papers ; 2005-18
Forward premium puzzle
Spot and forward exchange rates
Foreign exchange market efficiency
Non-rationality in foreign exchange markets
Econometrics of the forward premium puzzle
Working Paper